Long-term Treasury yields are on the rise

May 20th, 2025

RECAPPING LAST WEEK

U.S. equity indices rallied sharply—breaking above key technical resistance levels—after the U.S. and China reached a better-than-expected agreement to curb tariffs for the next three months. The Nasdaq Composite index soared 7.2%, while the S&P500 jumped 5.3%—into positive territory for the year—and the Russell 2000 rose 4.5%. S&P500 sector returns were overwhelmingly positive, led by strong gains in technology. The semiconductor sub-index surged 10% after the U.S. Commerce Department officially rescinded the rule restricting advanced chip exports, which had been set to take effect Thursday. Healthcare continued to lag as UnitedHealth Group’s struggles weighed on the sector.

Early-week gains in crude oil were pared after a potential nuclear deal between the U.S. and Iran—OPEC’s third-largest producer—suggested that global oil supplies may increase. Gold futures slumped 4% as trade tensions eased, while Bitcoin was nearly flat for the week. U.S. Treasury yields climbed despite tame inflation reports. Fed Chair Powell warned that longer-term interest rates are likely to be higher as the economic environment changes and Fed policy adjusts. U.S. CPI rose 0.2% last month, setting the 12-month rate at 2.3%–the lowest level since February 2021. Core CPI remained elevated at 2.8% YoY as shelter prices continued to rise. Producer prices surprisingly fell in April with the cost of services declining the most since 2009.

Thus far, businesses do not seem to be passing along higher costs from tariffs as profit margin measures experienced a historic drop. Unlike in recent months, investors largely shrugged off another dismal consumer sentiment report with the index falling to its second-lowest reading on record this month. Most of the survey was completed before the U.S.-China tariff pause was announced. Inflation expectations ramped up yet again with year-ahead rising to 7.3% from 6.5% and longer-term inching up to 4.6% from 4.4%. In other economic news, U.S. retail sales slowed to 0.1% growth in April as households pulled back on discretionary spending items such as airline tickets and hotels. Retail giant Walmart surpassed sales expectations last quarter but warned that tariffs will lead to higher prices starting later this month. Manufacturing activity continued to soften this month, according to surveys conducted by the New York and Philadelphia Fed, while homebuilder confidence and housing permits slumped in what is typically the stronger spring season. Overseas, the UK economy grew more than expected in Q1 at 0.7%, although the Bank of England tempered its forecasts for the full year. Japan’s GDP contracted by 0.2% quarter-on- quarter and by 0.7% on an annualized basis as trade uncertainties caused an export drop.

THE WEEK AHEAD

Last week, Chair Powell made some interesting comments regarding the Federal Reserve’s approach to monetary policy. He said the FOMC needs to reconsider the key elements of its dual mandate regarding inflation and employment, given the possibility that supply shocks and price increases may become more frequent.

Powell’s remarks suggest a potential for tolerating higher inflation as long as the jobs market remains strong. Traders have pushed out odds of the next interest rate cut to September with only one additional cut expected by year-end as recession fears have eased. However, the Moody’s downgrade of the U.S. credit rating over the weekend adds another risk factor to consider, as long-term Treasury yields are on the rise.

Turning to the upcoming week, the economic calendar is light with the global flash PMI readings the main releases of interest. In the U.S., retail giants Home Depot and Target will report earnings before the market opens on Tuesday and Wednesday, respectively. New and existing home sales round out the domestic calendar. Overseas, China was scheduled to release its monthly industrial production and retail sales figures on Sunday evening. The Reserve Bank of Australia is expected to reduce rates by 25 basis points on Tuesday. Inflation updates from Canada, the UK, and Japan are also on the docket. Finally, the first direct Russia-Ukraine talks in three years ended after less than two hours on Friday, dampening hopes for ongoing negotiations.

(Schwab)

Definitions

Annualized Return: The rate at which an investment grows each year over the period to arrive at the final valuation.
Bear Market: A decline of at least 20% from the market’s high point to its low.
Beta: A measure of how an individual asset moves when the overall stock market increases or decreases.
Correlation: A measure of the extent to which two variables are related.
Dividend Yield: The dividend yield or dividend-price ratio of a share is the dividend per share, divided by the price per share. It is also a company’s total annual dividend
payments divided by its market capitalization, assuming the number of sharesis constant.
Developed Markets: A country that is most developed in terms of its economy and capital markets. The country must be high income, but this also includes openness
to foreign ownership, ease of capital movement, and efficiency of market institutions.
Emerging Markets: A country that has some characteristics of a developed market but does not fully meet its standards. This includes markets that may become
developed marketsin the future or were in the past.
GrowthFactor Stocks: Growth stocks are companies expected to grow sales and earnings at a fasterrate than the market average.
LargeCap Stocks: Shares of publicly traded corporationswith a market capitalization of $10 billion or more.
LTM: An acronymfor”Last Twelve Months”or the past one year.
NTM:An acronymfor”Next Twelve Months” or the next one year.
Price Return: The rate of return on an investment portfolio, where the return measure takes into account only the capital appreciation of the portfolio, not including
income generated in the form of interest or dividends.
Total Return: Return on a portfolio of investmentsincluding capital appreciation and income received on the portfolio.
Small Cap Stocks: Small-cap stocks are shares of companieswith a market capitalization of less than $2 billion.
Standard Deviation: In statistics, the standard deviation is a measure of the amount of variation or dispersion of a set of values. A low standard deviation indicates the
valuestend to be close to the historical average of the data set, while a high standarddeviationindicatesthe current value is outside of the historical average range.
Value Factor Stocks: Stocksthat are inexpensive relative to the broad market based on measures of fundamental value (e.g., price to earnings or price to book).

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